Alliant Credit Union, a Chicago-based credit union which is active in the institutional commercial real estate lending market, has identified a new niche – bridge-to-bridge lending.
Bridge-to-bridge lending has emerged as borrowers are seeking to replace an existing bridge loan with another short-term financing rather than lock in permanent financing, said Charles Krawitz, Alliant’s head of commercial lending.
Demand for a short-term loan to replace a bridge loan is rising as borrowers look at maturing short-term debt on solid properties with strong fundamentals but have not yet completed a business plan or simply don’t want to lock in long-term debt at today’s higher rates, Krawitz explained.
“We see a lot of bridge-to-bridge requests,” Krawitz told Real Estate Capital USA. “The claim is ‘We are now on the 10-yard line and almost in the end zone.’ While this is often true, there are also cases when getting in the end zone requires achieving rents that are disproportionate to the market.”
The credit union also sees a niche in working with other lenders to provide short-term financing and construction lending.
“Part of our business has been lending to niche lenders – [those] involved in bridge lending and perhaps construction lending,” Krawitz added. “That is going to be a larger portion of our business next year. From a risk perspective, we like to play a protective role in the overall capital stack and help these niche lenders lower their overall cost of capital.”
The firm has already established several relationships in this part of the market, which Krawitz projects will account for three quarters of its lending activity in 2023. Still, Alliant Credit is expecting much lower originations in the coming year. Krawitz projects that in 2023, Alliant Credit will close half of the $1 billion of transactions it will complete by the end of this year.
“We project around $450 million overall, which is down significantly,” said Krawitz.
“Some of our lending will be directed to transitional opportunities. That said, we will avoid highly leveraged transactions wherein success hinges on the achievement of aggressive income levels, such as a highly amenitized multifamily property seeking peak rents in a small marketplace. This is where there will be more bridge-to-bridge financing as a means of proving out performance,” he added.
Moving forward, Alliant expects a retreat of capital and far fewer transactions. “For buyers and sellers, there’s a disjoint going on in the overall marketplace, and so not a lot of transactional activity will be dampened, but mandatory refinancings will continue” said Krawitz.
But for Alliant, a balance sheet lender, these situations have always presented opportunities. Additionally, lenders and other credit unions have been increasing their stake in the lending market.
“We are a lesser-known name in the commercial real estate financing realm,” said Krawitz, adding that credit unions in general are not thought of as sources of commercial real estate capital.
“However, we have been able to pursue significant opportunities by developing a network of top-tier commercial mortgage brokers across the country,” said Krawitz. “Over time we have proven to be a reliable source of capital, and this has allowed us to become a ‘go to lender’ for many of these brokers.”
Still, there are concern about inflation and the consumer and how that impacts commercial real estate.
“With a lot of uncertainty in the market, some of the larger sources of capital are all going into a period of hibernation,” added Krawitz. “How long it lasts is hard to tell. But as long as there’s a lot of economic uncertainty, you’ll see more apprehension across commercial real estate capital [markets], [as well as] in bonds and equities.”